This weekend, I'd like to welcome Eric Hiller to Spend Matters. Eric, who is founder and Chief Product Officer at aPriori, will be contributing a series of guest weekend posts on the subject of driving Spend Management upstream. And this is the second installment. Please join in welcoming Eric to Spend Matters!
Yesterday, we talked about the common Language of Business (Cost) and how we need to translate the function-specific languages of product design, sourcing strategy, and manufacturing planning into this lingua franca. Today, we look at the problem of why products launch over cost targets by considering the metrics to which we have visibility during product development.
Consider the diagram above. In business, we are always trying to balance the value we deliver to the customer in our products with the profit our own firm receives. Products (from a value point of view) are not made of nuts, castings, circuit boards, but of product "attributes," such as functionality, capability, quality, reliability, performance, fuel economy, weight, size, serviceability, etc. I don't have enough colors on my palette that won't clash to show all these on the diagram, and everyone likes alliterations, so let's combine all product attributes into Form, Fit, and Function. These "three F's" are the world that product development sees today.
In the diagram, each oval represents a region of an attribute that is acceptable to the customer. Because the product must satisfy all these attributes, the intersection of the three describes the possible solution space of designs that will work. I've ringed this solution space in a dashed border. Competent development teams (i.e. design engineers, process planners, sourcing agents, and program/project management) typically are able to launch products that fall into this intersection space. But often, after product launch, the teams find they have violated a critical constraint in the problem. The product is on the wrong side of the Target Cost set by Marketing (see figure below). Therefore, we are not making enough Profit for our company.
So why are development teams able to proficiently make all the complex tradeoffs in Form, Fit, and Function and yet not satisfy this ‘simple' constraint from marketing or finance? Answer: We have VISIBILITY into the Form, Fit, and Function of the product while we are developing it, but we do not have Cost Visibility™, because we are missing the Fourth F™...Finance. By the way, it's not as if "Finance" did not exist before. The Fourth F has always been there. It's just that the designers, early procurement, and manufacturing planners have never had clear visibility into cost before a product launched.
But, you might protest – I know my costs; that's why my company spends so much time on maintaining an accurate accounting system. Well... yes that's true, but accounting produces a cost AFTER the product is in production. By then many of the largest opportunities to reduce product cost have passed. We need cost visibility BEFORE we finalize design release, sourcing, and the manufacturing plan. And, this isn't a new idea... DARPA released a well known study dating back to the 1960's (oft repeated and referenced and accepted by most people) that 80% of the cost of a product is determined by the first 20% of the decisions made in product development.
It's like the old maxim (which has been attributed to many possible authors) says, "You can't manage what you can't measure." Think about it: CAD, CAM, CAE, packaging, physical testing, sourcing, capacity planning, etc. tools abound! In this day and age of computers, development teams have highly advanced software tools, applications, and enterprise platforms to assess, manage, and improve every important product attribute early in development, except one: COST.
If we can expose the Fourth F before launch and give the development teams direct visibility into cost, the solution space changes as shown in the figure below. When development teams know the boundaries of the solution space and can clearly triangulate where they are relative to it, I believe that they will take the right steps to move into that solution space... they do this with Form, Fit, and Function, so why wouldn't they with Finance, once the Fourth F is unmasked?
What does exposing the Fourth F mean practically? It means being able to provide product cost to the people who can impact and reduce it at any time and as early as possible in the product development cycle. That is the goal of Enterprise Cost Management — to provide the software platform and techniques for companies to accurately measure, control, and reduce their product cost.
Great, so how do we get started tactically with ECM? Stop back next weekend when we delve it the engine that powers ECM: Cost Models – what are they and what flavors to they come in?